Vertical Intra-Industry Trade: An Empirical Examination of the Austria’s Auto-Parts Industry

A distinctive feature of present globalization is the development of international production sharing activities i.e. production fragmentation. The increased importance of fragmentation in world trade has created an interest among trade economists in explaining the determinants of intra-industry trade (IIT) in intermediate goods. In this study the extent of IIT in Austria’s auto-parts trade is analyzed by decomposing Austria’s auto-parts trade into one-way trade, vertical IIT and horizontal intra-industry trade IIT. Then development of the vertical IIT in the auto-parts industry, as an indicator for international fragmentation of production process between Austria and its 29 trading partners, is examined and various country-specific factors suggested by fragmentation literature are tested using newly developed panel econometrics techniques and more recent data from 1996 to 2006. The results show that a substantial part of IIT in the Austrian auto-parts industry was vertical IIT and the econometric results mainly support the hypothesis drawn from the fragmentation results. In particular, the findings show that the extent of Austria’s vertical IIT in auto-parts is positively correlated with average market size, differences in per capita GDP, and foreign direct investment while it is negatively correlated with distance.